Receivables, Payables and Provisions
This domain tests irrecoverable debts, allowances for receivables, recoveries, payables and provisions under IAS 37. Exam questions require distinguishing a write-off from an allowance and deciding whether a provision is recognised.
Core rules
- Write off an irrecoverable debt when it is confirmed bad: debit irrecoverable debts expense; credit receivables.
- An allowance for receivables is an estimate of doubtful debts; it reduces receivables and creates an expense for the increase.
- A recovery of a previously written-off debt is income, often recorded through the receivables or cash book.
- A provision is recognised when there is a present obligation from a past event, probable outflow and reliable estimate.
- Contingent liabilities are disclosed unless remote; contingent assets are not recognised unless virtually certain.
- Payables are liabilities for goods or services received; they exclude future intentions.
Worked example
Receivables are 50,000. A debt of 1,000 is written off. Receivables become 49,000. An allowance of 5% is required: 49,000 x 5% = 2,450. If the existing allowance was 2,000, the increase is 450. Total charge to profit or loss is 1,000 bad debt plus 450 allowance increase = 1,450. The statement of financial position shows receivables of 46,550 after the allowance.
Traps
- Debiting an allowance directly against receivables instead of using an allowance account.
- Charging the full required allowance instead of the movement.
- Recognising a provision when outflow is only possible, not probable.
- Treating a contingent asset as a receivable.